Chegg (CHGG -0.84%)is a digital student learning platform that offers digital and physical textbook rentals, online tutoring, and other student services in the U.S. and abroad. It's no surprise then that students flocked to the platform at the onset of the pandemic as schools turned to at-home learning. As a result, Chegg's stock price shot up from $29 a share in early March 2020 to $87 by August.
However, as the coronavirus pandemic comes under control and billions of people get vaccinated, schools worldwide have (or are planning to) bring students back to campus. That is partly the reason that investor enthusiasm for the online learning platform has waned. The stock price fell 20% in the last month alone and almost 35% from its peak of $113 a share. The sell-off could also be related to the market losing some interest in growth stocks generally at the moment.
I think the selling on Chegg is overdone. Here are two reasons to buy this beaten-down growth stock.
1. Online classes are not going away
Many investors understand that Chegg benefited as learning moved online during the pandemic, but some didn't know why. Many classrooms (at least at the university I teach at) don't provide computers for students while in class. So, if an assignment needs to be completed in class, students had less access to the internet and to Chegg.com. When all classes went online during the pandemic, students had access to Chegg.com and used the site more often.
So, yes, when students return to learning on campus, it may cause a decrease in their use of Chegg.com. However, even before the pandemic, colleges and universities were offering online classes. It's my hunch that in the aftermath of COVID-19, there will be more classes offered with an online option than before. Students have indicated they like having the online option.
2. Chegg offers content that users need
Students come to Chegg for content. In most cases, it will be a student who's grappling with a homework problem and gets stuck and needs help. Sending an email to your professor is one option, but it can take hours to get a response. Another option is to type your question into Chegg. The website has millions of pieces of content related to college-level classes the students are taking, including problems solved, textbook solutions, expert explanations, and step-by-step solutions. Chances are you will find the help you're looking for.
In the most recent quarter, Chegg said it had 59 million pieces of class-related content. That's up from 53 million in the prior quarter and 37 million in the year prior. So how does Chegg get its content? Students who subscribe to Chegg's study services pay $14.95 per month and get to ask subject matter experts 20 questions each month as part of their membership. These questions and answers are maintained on Chegg.com for all subscribers to access.
What's more, this content helps attracts new sign-ups cost effectively. For example, students type the problem they are working on into a search engine, and up pops up the result from Chegg.com, showing it has a step-by-step explanation. The students can sign up and get access to the help they need. This profitable business plan is partly why Chegg has increased adjusted EBITDA at a compound annual rate of 78% from 2016 to 2020.
The 20% sell-off brought the stock down so it is now trading at a forward price-to-sales ratio of 13, which is back down near the level it was trading at in May of 2020. Although the business is better than it was then, with millions more pieces of content, it has already been paid for and can be used to attract new members for years to come. So investors looking for a growth stock that's been oversold can add Chegg to their portfolios.